On March 30, 2023, Advocate General (AG) Tamara Capeta of the Court of Justice of the European Union (CJEU) published her opinion in relation to a preliminary reference submitted by the Budapest High Court (Case C-106/22).

In this case, Xella Magyarország, a Hungarian company owned by a company registered in Bermuda, negotiated the takeover of Janes, a Hungarian company which owns a quarry in Hungary. Under Hungarian law, Janes is considered to be a "strategic company" because its activities cover "critically important raw materials." The takeover therefore had to be reported to the Minister, who decided to block the acquisition.

The reason for the preliminary reference was to determine whether the Hungarian law allowing the Minister to veto the acquisition of a Hungarian company by an EU undertaking with third-country shareholding is compatible both with the rules on the internal market (Article 65(1)(b) TFEU) and with the Foreign Direct Investment (FDI) Screening Regulation (Regulation (EU) 2019/452).

This opinion, given as guidance to the CJEU before final judgement, is noteworthy for at least two reasons: (i) it gives an overview of the elaborate legal framework governing foreign direct investments in the EU; and (ii) AG Capeta puts forward an interpretation of the FDI Screening Regulation which takes account of some of the geopolitical challenges faced by the EU.

1) AG Capeta's analysis of the legal framework for EU FDI screening

  • The EU FDI legal framework resides at the crossroads of the EU internal market and the common commercial policy

As evidenced by AG Capeta in her opinion, "direct investment" is an EU law concept which first derived from the free movement of capital within the internal market, an area of shared competence between the EU and Members States. This free movement of capital also applies to foreign direct investment.

For many years, Member States with FDI screening legislation had to comply with the rules on the free movement of foreign direct investments and could only take measures on grounds of public policy or public security (Article 65(1)(b) TFEU).

However, since the Lisbon Treaty, FDI has been enshrined as a concept in primary EU law under the common commercial policy (CCP). The CCP is an area in which the EU has exclusive competence, and AG Capeta therefore found there to be an overlap, with FDI being covered by two different EU competences, one shared and one exclusive: the internal market (free movement of capital) and the CCP.

  • The FDI Screening Regulation: an attempt to bridge the gap between the internal market and the CCP framework

In 2019, based on the CCP, the EU adopted the FDI Screening Regulation which authorizes (but does not oblige) Member States to legislate on FDI screening. (More information regarding this Regulation can be found here.) According to AG Capeta, this Regulation decentralized FDI screening in an attempt to respect traditional internal market rules while maintaining a uniform and comprehensive approach to the CCP.

Still, there is a lack of clarity regarding the scenario in which an EU undertaking is acquired by another EU undertaking that has a third-country shareholding. And it is this lack of clarity that led the Hungarian court to ask the CJEU for guidance regarding how exactly it should apply the FDI Screening Regulation and the internal market rules in this case.

2) AG Capeta's interpretation of the FDI Screening Regulation

  • The scope of the FDI Screening Regulation includes indirect FDI

The FDI Screening Regulation defines FDI as an investment "of any kind" by a foreign investor aiming to establish, inter alia, lasting and direct links between the foreign investor and the European undertaking.

The European Commission has taken this provision to apply only to foreign investors. Thus, it does not consider EU-based undertakings – i.e., undertakings having their corporate seat within the EU-27 (like the two parties of the transaction at hand) – to be within the scope of the Regulation.

However, in her opinion AG Capeta found that the phrase "investments of any kind" encompasses any type of investment through which the foreign investor gains effective participation in, or control over, an EU undertaking and that it imposes no limitation as to the structure or the investment process itself. Hence, what is important when considering whether to apply the FDI Screening Regulation, is who ultimately acquires control over the EU undertaking in question. Therefore, according to the AG, the FDI Screening Regulation also applies to transactions between EU-based undertakings in cases where the acquiring undertaking has a third-party shareholder. This is also known as "indirect FDI."

To further strengthen her argument, AG Capeta referred to Article 4 of the Regulation, which specifically mentions that Member States should take into account indirect control by a third country, including through ownership structure or significant funding, as a factor when determining whether an FDI is likely to affect security or public order.

  • FDI screening measures must still comply with the principle of free movement of capital

If it is established that the Hungarian screening mechanism is applicable to intra-EU transactions, the measures must still comply with the principle of free movement of capital. In fact, according to AG Capeta, any transaction covered by a screening mechanism must benefit from a complete proportionality review.

AG Capeta indicated that this review should consider: (i) whether the measures' aim is legitimate and (ii) whether the measures are proportionate. In other words, the measures must both target a genuine and sufficiently serious threat to the security or public order, and be appropriate and necessary to accomplish this legitimate aim.

  • An opinion which foreshadows the future revision of the FDI Screening Regulation

Interestingly, AG Capeta prefaced her opinion by pleading for a mindset change within the EU to overcome an outdated fear of perceived protectionism within the EU, and to be more conscious of national security threats, which are at the heart of the open strategic autonomy EU trade policy.

Furthermore, she references the European Commission's 2023 Work Programme. This document hints at a possible upcoming revision of the FDI Screening Regulation to strengthen economic security in times of high economic uncertainty.

AG Capeta has put forward a broad interpretation of the Regulation that she evidently believes is aligned with the EU's current geopolitical ambitions. In doing so, she has presented the CJEU with a dilemma: should it follow her forward-looking opinion or render a judgement that risks appearing anachronistic in light of her understanding of what EU FDI screening legislation should look like in the future. Time will tell which direction the CJEU will take and to what extent it will decide to boost an amendment to the FDI Screening Regulation through its case law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.